Operator
Good morning and welcome to Kelly Services' second quarter 2026 earnings conference call. All parties will be on listen only until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Scott Thomas, Kelly's Head of Investor Relations. Please go ahead.
Good morning and welcome to Kelly's second quarter conference call. With me today are Kelly's Chief Executive Officer, Chris Layden, and our Chief Financial Officer, Troy Anderson. Before we begin, I'll remind you that the comments made during today's call, including the Q&A session, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. We do not assume any obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. In addition, we'll discuss certain data on a reported and on an adjusted basis. Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations. For more information regarding non-GAAP measures and other required disclosures, please refer to our earnings press release, presentation, and once filed, 4-in-10-Q, all of which can be accessed through our investor relations website at ir.kellyservices.com. With that, I'll turn the call over to Chris.
Thank you, Scott, and good morning, everyone. It's great to be with all of you.
In the second quarter, we measurably exceeded our guidance for both total company revenue in adjusted EBITDA margin. These results were driven primarily by positive momentum from our growth and efficiency initiatives. We continue to capitalize on organic growth drivers and constructive demand trends across the enterprise as well. Notably, Kelly's adjusted EBITDA margin returned to 3% in the quarter. This achievement demonstrates our ability to generate operating leverage in pursuit of growth as we continue to re-engineer our cost base while driving greater value for our customers as a strategic workforce partner. The value we deliver continue to be recognized in the quarter, as Everest Group named Kelly a leader in its 2026 peak matrix for RPO and for staffing and solutions in engineering, IT, business and professional, and industrial. In addition, Forbes once again ranked Kelly among America's best temporary staffing and professional recruiting companies. These accolades are a testament to 80 years of industry leadership and our unwavering focus on meeting the evolving needs of our customers and talent. At the segment level, we delivered sequential improvements in each of our businesses. ETM capitalized on broad-based demand for professional and industrial staffing among both new and existing customers. Talent solutions benefited from the ramp-up of recent MSP wins. Continued growth in talent solutions reflects the differentiation of our technology-enabled and AI-powered offerings.
Within SET, revenue grew on a sequential basis for the first time in two years.
This represents an inflection point driven by improving trends across each specialty vertical and strong execution by our team following the completion of the leadership transition in the first quarter. SET's outcome-based solutions also contributed to positive momentum, with revenue increasing over the prior year and contributing 40% of SET's total revenue in the quarter, up from about one-third a year ago. This reflects an intentional shift in our business mix as we increasingly leverage our specialized technical expertise across SETS specialty areas to deliver milestone and SLA-based solutions to our customers. And in education, the second quarter marked the conclusion of a strong sales cycle for our K-12 staffing business. The cycle included a 100% renewal rate in the quarter, a significant milestone underpinned by industry-leading fill rates and customer satisfaction. We also delivered a year-over-year increase in net new customer wins, which will come online beginning in the third quarter with the start of the new school year. These positive outcomes reflect the differentiated value we deliver and the depth of our relationships as the largest provider of education staffing solutions in the U.S. Across ETM and SET, our one Kelly Enterprise go-to-market approach continued to generate positive traction with our customers. The recent expansion of our relationship with the leading North American water technology company illustrates the potential of this model. What began as an engineering staffing engagement grew into a consultative workforce partnership through a unified effort across SET and ETM. Our teams leveraged their combined insights into the company's contingent talent management strategy to identify additional capabilities which address their needs, positioning Kelly to capture the MSP. Through this win, we're well positioned to further expand this relationship as the customer moves forward with plans to double the size of their business by 2030. This is our One Kelly Enterprise go-to-market approach in action. By supporting our customers as a unified team and bringing the full strength of our portfolio to bear, we're better able to anticipate their needs and position Kelly as a strategic partner in their success. As we scale our enhanced go-to-market approach, our technology modernization initiative is a key enabler. To that end, we've delivered another milestone on our journey with a successful cutover onto a unified CRM platform. Powered by AI, this platform enables increased transparency and high-conviction forecasting, while also driving cross-selling opportunities across the business. These capabilities are foundational to Kelly's integrated commercial operating framework. Championed by our growth office, this framework is strengthening account planning to capture greater market share and accelerate profitable growth. We also accelerated the integration of AI across the enterprise to drive efficiency and enhance the talent and customer experience. Growing employee adoption of Grace Boost, our proprietary internal AI platform, is driving increased productivity at a small fraction of the utilization cost of third-party AI platforms. For talent and customers, we continue to scale our AI-enabled recruiting solution to create a more streamlined experience for both. Our solution can operate 24-7 and connect with applicants within minutes of receiving their application, increasing the throughput of highly qualified candidates. Feedback has been positive. Talent appreciate the responsiveness of the application and screening process, while customers value the reduction in cycle time. We're actively scaling new use cases, including for talent care, as we pursue opportunities to reduce turnover and increase redeployment to new assignments with our customers. As our technology modernization initiative creates a foundation for innovative AI-powered offerings, we're evolving our strategy to drive deeper alignment between these critical work streams. That's why I'm pleased that we recently welcomed Alan Sokolsky as Kelly's Chief Product and Technology Officer. Alan brings significant technology and digital leadership experience to this newly created role. His background includes more than 20 years in staffing and a track record of aligning technology and product strategy to accelerate profitable growth. At Kelly, Alan will oversee product development, technology, and digital innovation efforts across the enterprise. I'm confident he'll be able to help us scale and optimize what's working today while building new capabilities that will define the future of work, from the products our teams will use to deploy our specialized technical solutions to autonomous AI agents. As we continue to solidify our management team in the second quarter, we further strengthened our board of directors as well. In May, we welcome three new directors, Ryan McCrory, Michael Wartell, and George Woody Young. Each of these directors brings extensive experience, which positions them to be strong contributors to the board as we drive progress on Kelly's strategic journey. I'm pleased with our achievements in the second quarter, which reflect discipline execution on our growth and efficiency priorities. The meaningful progress we've delivered on our strategy has set us up on a positive trajectory entering the second half of 2026. I'll now turn the call over to Troy to talk through the quarter in more detail and our expectations for the balance of the year. Troy?
Thank you, Chris, and good morning, everyone. I'm pleased to report second quarter results that both exceeded our guidance and reflect clear sequential improvement across our business. We are increasingly confident with the momentum we've established and are adjusting our full-year expectations favorably as a result. For the second quarter, revenue totaled $1.04 billion, a decline of 5.8% versus the prior year quarter, and measurably better than our guidance of down 7% to 9%. The year-over-year revenue decline improves 500 basis points relative to the first quarter. Underlying revenue, which excludes the previously disclosed discrete impacts driven by reduced demand from the federal government and three large ETM customers declined approximately 0.6%, an improvement of 270 basis points versus the first quarter, thus contributing more than half of the overall year-over-year improvement versus Q1. We expect to fully anniversary the year-over-year discrete impacts in the fourth quarter. Demand across the federal government and the two large ETM customers who remain active has been relatively stable the past three quarters. At the segment level, ETM underlying revenue grew 3.1% year-over-year, which is an improvement of 350 basis points versus the first quarter decline. Staffing and outcome-based solutions, excluding contact center, returned to growth, with staffing growing approximately 3%, driven by strong demand across a variety of clients and industries. Talent solutions grew for the second consecutive quarter. The growth of approximately 6% was driven by ramping new wins and increased overall demand across the RPO and MSP specialties, with both showing double-digit growth. SET underlying revenue declined 3% year-over-year, an improvement of 300 basis points versus the first quarter. Each specialty area showed year-over-year improvement versus Q1, while telecom delivered another quarter of year-over-year growth. Education declined 4.4%, which was a 40 basis point improvement versus the first quarter. The decline reflects the ongoing impacts of prior year-delayed new contract decisions and overall reduced demand in key markets due to enrollment declines. With year-over-year growth and our new business signings, a strong renewal cycle, and accelerating growth in therapy, we expect a return to year-over-year growth in the second half of the year. Gross profit was $212 million, down 6% versus the prior year quarter, reflecting the lower revenue volume. The gross profit rate was 20.4%, essentially flat for the prior year, and up 150 basis points sequentially from the first quarter, reflecting seasonality for employee-related costs and favorable business mix. All three business units saw notable improvement in their gross profit rates relative to the first quarter. For year-over-year performance, ETM improved 50 base points, while SET and Education both reduced their year-over-year declines relative to Q1. Reported SG&A expenses were $195.9 million, down 5.5% versus the prior year quarter. And adjusted SG&A expenses were $192.7 million, down 4.1%, reflecting the continued focus with our structural and volume-related cost optimization efforts, along with investment in growth, technology, and other areas. Core adjusted SG&A expenses, which exclude depreciation, amortization, and incentives, continued the sequential decline trend that has been in place since Q1 of 2025. In the quarter, adjusted SG&A expenses decreased across all three segments as we continue to drive durable and sustainable efficiencies in our operating model through technology enhancements and process efficiencies, including leveraging AI. This includes benefits from the prior year realignments within the ETM segment and the acquisition integration within SET. For the year, we're projecting a net year-over-year decline in core SG&A expenses of approximately $25 million, or 4%, despite investments being made in technology, the growth office, and other areas. The structural changes we are making will allow us to scale more efficiently as we grow, thus supporting our margin expansion expectations in the second half of the year and beyond. Our reported diluted earnings per share was $0.31 for the quarter. On an adjusted basis, we delivered earnings per share of $0.37 compared to $0.54 in the prior year. The year-over-year decline reflects lower profitability and a more normalized effective tax rate. For our adjusted results, in connection with our various efforts, we recognized 3.2 million of charges in the quarter, reflecting reduced integration, realignment, and restructuring costs, as well as transaction costs relative to Q1. We expect to continue incurring various charges throughout 2026 as we advance our technology modernization journey and expand upon our various optimization efforts. Adjusted EBITDA was 31.1 million with an adjusted EBITDA margin of 3%. This was well above our guidance of at least 2.5% and represents 150 basis points of sequential improvement from the first quarter. On a year-over-year basis, adjusted EBITDA margin declined 40 basis points, significantly narrowing the decline versus recent quarters, reflecting the improved revenue and gross profit rate declines in our continued SG&A discipline. For the segments, ETM and SET adjusted EBITDA margin improved approximately 200 and 100 basis points versus Q1, respectively, while education was stable. Each segment was down year-over-year, with ETM down only 10 basis points, a notable improvement relative to the past several quarters. Our balance sheet remains strong and continues to provide ample capital allocation flexibility. Total available liquidity as of the end of the quarter was $303 million, comprised of $24 million in cash and $279 million available on our credit facilities. During the quarter, we generated $47.7 million of free cash flow and net reduced our debt by $52.4 million, resulting in total debt of $78.1 million a quarter in. Of note, during the quarter, we amended our accounts receivable securitization facility, primarily to extend the term by a year, along with other ancillary benefits that increased flexibility and reduce our cost of capital we maintain our quarterly dividend of 7.5 cents per share during the quarter we remain confident in kelly's cash generation and are committed to a disciplined and opportunistic approach to capital allocation and pursuit of attractive returns for shareholders as we turn to the outlook for the remainder of 2026 our expectations have improved relative to the initial view we established in february and remain unchanged for adjusted the EBITDA margin. Our expectations assume no material change in the macroeconomic environment in the coming quarters. For Q3, we expect to show measurable year-over-year improvement relative to Q2. Before I jump into specifics, I want to remind everyone that Q3 is the lowest revenue quarter and therefore a lower profit quarter from Kelly due to seasonality in our education business as a result of schools being out of session the majority of the quarter. With our volume-based revenue model, this results in notable sequential revenue in adjusted EBITDA declines from Q2 to Q3 along with lower margins and then a strong bounce back in the fourth quarter. For the third quarter, we expect underlying revenue growth of 1% to 2% and total revenue to be flat to a decline of 2% versus the prior year. For adjusted EBITDA margin, we expect year-over-year improvement of 40 to 50 basis points in the quarter, resulting in adjusted EBITDA margin in the low 2% range. For Q4, we expect to see further year-over-year improvements for both revenue growth and adjusted EBITDA margin, with total revenue growth in the mid to upper single digits and approximately 200 basis points of year-over-year adjusted EBITDA margin expansion, resulting in adjusted EBITDA margin of approximately 4%. This includes the impact of an extra fiscal week in the fourth quarter, which benefits revenue growth by approximately four points in the quarter, but negatively impacts adjusted EBITDA. On a fiscal year basis, that should translate to a roughly low to mid-single-digit total revenue decline and 10 to 20 basis points of year-over-year improvement in adjusted EBITDA margin. We are excited about the trajectory of our business going into the second half of the year. I'm thankful for all the Kelly team members and their commitment and resilience as we focus on delivering growth and enhanced profitability over the long term. I'll now turn the call back over to Chris for his closing remarks.
Thank you, Troy. The momentum we've generated strengthens our conviction and our strategy and reinforces our confidence and our expectation of further measurable improvement in our year-over-year performance in the second half of the year. As we move forward, we remain well positioned to capitalize on organic growth drivers in each of our businesses. These include capturing additional K-12 staffing and therapy market share in education, capitalizing on the shift towards higher margin statement of work and consulting engagements in SET, and growing demand for ETM's total talent management solutions among large enterprises. In addition to these growth drivers, we're seeing secular trends taking shape in markets where our breadth of offerings and depth of technical domain expertise are well-suited to meet growing demand. Among these trends is industrial reshoring, which is driving significant expansion in U.S. manufacturing. Domestic semiconductor manufacturing capacity is expected to triple over the next decade, driven by the CHIPS and Science Act. With the construction of new fabrication sites underway across the country, demand for highly specialized talent needed to build and operate them is growing at a rapid pace, from electrical and process engineers to product developers to field and service technicians. Kelly is well-established as a leading workforce solutions provider to the world's largest semiconductor fabricators, and we continue to win new semiconductor logos in the first half of the year. Our set and ETN businesses offer the breadth of solutions and depth of technical domain expertise and industry-leading scale uniquely situated in Kelly to meet this moment. Industrial reshoring momentum extends beyond semiconductors to other areas as well. The development of breakthrough drugs and treatments is driving companies throughout the life science value chain to accelerate their investments in U.S. manufacturing. This shift is increasing talent demand while introducing operational risk and uncertainty for companies investing in their supply chains to ramp up production and distribution. As one of the largest life sciences solutions providers in the U.S., our SET business offers a differentiated functional service provider capability that mitigates these challenges. By providing just-in-time access to specialized talent through our proprietary methodology to support critical development milestones, we're enabling life science companies to develop new drugs and maintain high performance and quality outcomes at an optimal cost. We're also seeing AI contribute to significant investments in data centers, which is driving demand for workers with technology, engineering, and telecom expertise. This next phase of data center growth will favor organizations that can build, staff, and operate at scale in a sustainable way. And our set business is among the top providers of staffing and solutions across these key domains. Our tailored approach aligns workforce strategy with site selection, built schedules, and long-term operational planning. We're actively deploying this approach with new customers, including a global hyperscaler who engaged Kelly in the quarter to source critical-to-field mechanical and electrical engineers and technicians as it commissions new data centers in EMEA and APAC. Our growth and efficiency initiatives are positioning Kelly to capitalize on these opportunities. Our OneCali Enterprise go-to-market approach is bringing our full portfolio of solutions to the large multi-site manufacturers and infrastructure providers at the center of these trends. The unified CRM platform we implemented in the second quarter is a critical enabler of that work. It gives our teams the tools and visibility they need to identify the white space within our existing customer base and convert it into new business. As these new wins materialize, our structural efficiency enhancements will enable us to generate leverage across our operating model and convert a greater share of the incremental revenue to margin. We have more work to do, but I remain excited and energized about the opportunities ahead. Our strategy is delivering results. Our leadership is strong, and with the demand trends beginning to improve, we're well-positioned to capitalize and create value for our stakeholders. I'm grateful to our team for delivering on our commitments, and to our shareholders, customers, and talent for placing their trust in Kelly.
Operator, you can now open the call to questions.
Operator
Ladies and gentlemen, if you wish to ask a question, please press star 11 on your telephone keypad. You may withdraw your question at any time by repeating the star 1-1 command. If you're using your speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press star 1-1 at this time. For our first question, we'll go to Joe Gomes with Noble Capital. You may proceed.
Good morning, Chris and Troy. Hey, good morning, Joe and Joe.
Hey, I want to start off, maybe you could kind of try to square the circle here, so to speak, in the education business. You talk about still there's been a multi-quarter delay in contract decisions, but then you talk about the wins and some of the other positive information this morning. And maybe you could provide a little more color there. You know, on these delayed contract decisions, you know, when do those become not a delay but a lost opportunity type of thing? So I was wondering maybe a little more color on that education there.
Yeah, thanks, Joe. No, happy to jump in. And first, I think it's important, you know, to stress really this pressure is not structural. The single largest driver of that decline is really dream-driven in Florida with some of the enrollment declines that we talked about, also some of the school choice attrition. The good news is it's behind us. And as we think about the selling cycle we talked about, the 100% renewal rate that we saw, many of those renewals were in the state of Florida, which is a big part of our business. But we also saw a whole bunch of other new wins come online. But as a reminder, those wins will come online as the new school year starts. And so, you know, we get a selling cycle that is ending about right now, and we're implementing new districts. And then those districts will need our outsourced services for now the 26-27 school years so we really feel good about our selling momentum obviously the strength of not only our fill rates the customer satisfaction and the white space that's still out there for us to be able to grow outside of some of the the key districts we're in and we continue to also see big opportunities for us to to sell therapy and the acute need that our school districts, parents need in terms of that care, clinical care in schools. So that's a little bit more color on the education timing. Troy, is there anything else you want to add?
Yeah, Joe, I was just going to just one little point of clarification or expansion. So the contract delays we're talking about was last year's selling cycle. There was a lot of turmoil in the macro environment, the Department of Education, etc., and so, you know, those districts decided not to proceed with, or various districts decided not to proceed with an outsourcing arrangement, and that, we live with that through this whole school year, as Chris said, which now we have now seen our selling cycle and the improvement. The work has been done, to the last part of your question about, you know, when do they become lost decisions the work has been done for them to see the value proposition as Chris said uh you know on the fill rates uh on the client satisfaction etc um so it's really just just a matter of the process and working through them uh many of which then we went ahead and closed this year okay great thanks for that I appreciate that and then you hired Joel um you know over at set and just wondering what kind of the initial reaction there, what kind of steps are you seeing that he's taken
to really start to drive growth over there in the second unit?
Well, yes, and as a reminder, Joel's now in his second quarter and really excited about some of the momentum that's building. We referenced, right, but this is really a genuine inflection point in the quarter, And the improvement's been broad-based across SPET. Every specialty area, all five segments, showed year-over-year improvement versus Q1, with telecom and life sciences really leading the way with delivering year-over-year growth. And, you know, the meaningful mix progress that we reference now, having about 40% of that business be solution-oriented, that's a huge part of Joel and the team's focus. as we continue to move upstream. And then finally, I would say that in the technology space, we continue to see the benefit of a strong solutions pipeline. Our consultant out billing continues to be positive. And we know that there continues to be a lot of demand for solution-based business in the IT and services space. And then finally, within engineering, that segment is performing at a high level. We've got our average deal size is increasing sequentially. The pipeline velocity has been strong, and some of those trends, both on pipeline and velocity coming out of June, were the strongest that we had seen all year in that business. So now that Joel and the team are now fully in the throes of their operating model, we We know that SET is positioned to continue to build on this momentum in the second half of the year.
Okay. And then just one more for me. You know, Chris, you talked last quarter about taking a more, I'll say active role over an ETM, reviewing leadership there. I just wanted to give us a little more color as to how those efforts have proceeded here over the past quarter.
Yes. Yes, well, I think you can see, based on the performance of the ETM business, that we continue to be pleased with the steps we're making. We've got a really good leadership team in ETM who are really committed to client-centricity, accountability, and execution. So I continue to stay very close to the business, and as we have any changes there, I'll certainly make sure everyone is updated. But based on the progress in the business, we really feel good about the momentum coming out of the quarter.
Okay, great. Thanks for that, guys. I'll get back in queue.
Operator
Thank you. Our next question comes from CarTech Meadow with North Coast Research. You may proceed.
Hey, good morning. Chris, just a big picture question. Where do you think we are in the recovery phase in the industry? I know maybe each segment might be a little bit different, but just your overall feel as you talk to clients and kind of see some of the job orders, where do you think we are in the cycle?
Yeah, no, thanks, Kartik. You know, we really believe we've moved beyond stabilization, and we're into the early stages of recovery. You're seeing now two consecutive quarters of improving underlying revenue trends, underlying ETM returning to growth, and SET delivering sequential growth for the first time in two years, which really reflects, I think, that structural progress that I just referenced. And we're also seeing this in some of the operational indicators, right? Some of the key indicators, consultants outbilling in SET is increasing. We're seeing spend under management in the ETM business expanding as well. And I think, you know, really to the extent that that demand trend continues to improve, we're going to be well positioned to capitalize on as a result of the growth and efficiency initiatives that we're implementing and are delivering results in the quarter.
And then as you look at that, you know, I know in the past or maybe even now, one of the issues might be, hey, how is AI impacting that segment? You know, would you think AI right now is a headwind for the business, or are you seeing demand, and would you call it a tailwind right now for that particular business?
Well, I think it's a tailwind for us. And, you know, in many ways, I think that's reflected in the sequential quarter-on-quarter improvement that you see from us in the quarter, and really underpinned by our focus and really breadth and depth of capability to support the data center industry. We're supporting companies across all facets of the data center ecosystem, and this has a huge impact in SAT but also ETM and requires our BPO capability as well, increasingly where we're delivering solution-based work. That demand is an important growth driver. It shows up in engineering, in telecom, our digital infrastructure business, in our IT business, and we believe that's going to continue to grow. We're also benefited by, you know, the strength and really our leading engineering service capability. As you think about, you know, all of the, you know, critical infrastructure pillars that are required to support all the data center capital investment from, you know, power and cooling, commissioning, all the component supply chain. we really have unique domain expertise in this space that will allow us, you know, to continue to grow. So we're excited about the momentum there.
Thank you very much. I really appreciate it.
Operator
Thanks, Karthik. Thank you. Our next question comes from Kevin Steinke with Barrington Research Associates. You may proceed.
Great. Thanks. So, as you talked about in your prepared comments, you noted that your expectations have improved since February, which is reflected in your improved revenue outlook for full year 2026. Can you just maybe walk through the areas where the expectations have improved most materially? I mean, is it mostly related to the macro environment or internal business momentum, or where would you assign the most weight to for the improved expectations?
Yeah, thanks, Kevin. I'll maybe give a little bit of color and then have Troy talk about some of the detail in the segments. We're really pleased with the execution in the corridor. And, you know, the beat was driven by meaningful operational progress. including some demand trends. We continue to see a normalized gross profit rate. And it's really our continued SG&A discipline as well. These are not one-time items. And you're seeing that in terms of the structural impact and our ability to unlock more margin. The path of the second half of the year, though, is pretty clear. And I'll maybe point to three broad drivers for us. You know, the first is the discrete impacts anniversary in the fourth quarter. And so we see that runoff. And the second, the organic growth that we've been talking about, those drivers are gaining traction across each segment, across the business units, and even in education where we expect the second half of the year to flip back to growth. And then finally, the structural efficiency improvements we're creating, and that will continue to drive operating leverage as revenue hits an inflection point.
But I'll maybe toss it to Troy now to talk little bit about it at the segment level yeah thanks a good summary Chris you know look I think the certainly ETM has been strong both in Q1 and Q2 through all the combination of factors Chris has referenced in several of the prior questions so you know we feel good about the the progress their set I'd say is is probably more in line with expectations in education again we're seeing the turn there uh into the back half of the year um you know a little more pressure than than we thought coming into the year on the on the really on the volume side uh but from uh the new business and the growth and therapy and the like um are all you know as we were anticipating um you know going into the back half of the year and as chris said on the cost structure side uh we've uh been rigorous about that starting last year uh we've continued to see some benefits from some of the activity from last year with the realignment with INSET, with the integration work, I'm sorry, realignment with the ETM and the integration work with INSET, and we continue to look for further optimization opportunities, benefits from AI, or technology modernization. So all of those things are coming together nicely and, you know, delivering some opportunity for upside in the back half of the year.
Okay, great. And, you know, within ETM, you talked about the broad-based demand for professional and industrial staffing that you're seeing, and you talked about the semiconductor angle and the reshoring. So from that commentary, it seems like, do you feel like there's some real legs to this in terms of continuing demand and combined with your ability to win new business? What do you think the sustainability of this improved P&I staffing demand is?
Yeah, well, I would say to start, customer sentiment in the quarter was increasingly positive and a step forward from Q1, really across the business, but also some broader macro trends supporting some of the industrial output that we've now seen picking up some momentum, including with ISMs, BMI data, continuing to show some expansion. Within ETM, though, customers are leaning into broader talent management programs, and I think that's important given the strength of our leading MSP and RPO offerings. they're now being used as a strategic workforce tool. This isn't just a temporary cost reduction measure that's being maybe used episodically, which continues to give us some real leverage with the large customers that we're working with. And then obviously our ability through the growth office and all of the other work that we're doing in the strategic account management space to go and capture more of that white space. We have, you know, leading offerings on the solutions and on the staffing side in P&I and also across set that allow us to go and support large enterprise customers. And, you know, the customers that I talk to, they want to be doing more with Kelly. And that's really why we continue to believe that, you know, one Kelly enterprise strategy gives our customers the unlock they're looking for. And we're making sure that we're driving that every single day.
All right, great. So within SET, you refer to a couple of times that you see this as an inflection point. So what do you think that means for the growth outlook going forward? And again, maybe, you know, in terms of the sustainability angle, you know, assuming we continue to see an overall improving macro environment or, you know, at least stable with where we are now. I mean, how do you think that business can trend over the coming quarters based on the momentum and the inflection point you saw there?
Well, the improvement is really broad-based, and I think it's important, you know, to really underscore that every specialty area showed improvement from Q1. And, you know, we referenced the telecom and life sciences delivered year-over-year growth, but it really is, you know, the breadth of what we're seeing from the demand side and the operational discipline that we have in terms of how we're converting that both to new solution assignments and projects and also new staffing revenue and NGP. You know, the technology business is the biggest segment within SET, and, you know, we continue to see positive momentum on the demand side and our selling focus continuing to move upstream and the opportunity for us to continue to differentiate with our solution capability there is a tremendous amount of demand there that we've got to go and convert. And then finally, on the engineering side, that performance is really not only driven by sequential quarter-on-quarter improvement, but the velocity and size of the pipeline continuing to improve. And as we referenced some of the opportunities, both in industrial reshoring and in the broader data center capital investment, the engineering and digital infrastructure telecom offerings that we have really positions us uniquely in the market to be able to support those needs. And finally, the strong performance exiting the quarter in engineering we know is going to continue to drive growth. So we feel good about the momentum.
Yeah, and I would just add, Kevin, in the Q4 expectation that we've outlined, we expect growth across all three segments, so ETM, SET, and education, excluding the 53rd week, which we noted in our materials and in the prepared remarks. And within SET, I would say it's across the specialties. We expect all the specialties to be reflecting year-over-year growth, except maybe government, you know, could be close. But otherwise, to Chris's point, it's broad-based.
Okay, that's helpful. I also wanted to ask about education. And you referenced the momentum and the therapy services there. you know how meaningful can that be at this point i i believe it's still a relatively small portion of uh the segment um relative to the you know the traditional substitute teacher k through 12 k through 12 staffing but um you know what can it mean for say in in a contract with a school district in terms of upsizing it or i don't know any other metrics that you'd point to in terms of its impact on the business?
Yeah, the therapy is one of the strongest growth opportunities we have. It's about 8% of the mix today and has a lot of opportunity to grow. We are encouraged by, you know, the selling cycle and support model there also follows the school calendar. And so we're gearing up for September. Really pleased with the progress we're making there. We have more therapy providers confirmed in September to start to support that work than any other time in our history. And so operationally, the team is very focused on getting ready for the start of the school year. And that really reflects not only the expansion of therapy be in new districts, new school districts that we're working with today, but importantly, continuing to sell with our leading K-12 offering. And so with some of the new wins coming online, first-time districts, now we have both therapy and our K-12 model embedded in that overall solution. Now, from a margin standpoint, It gives us a real opportunity just given the mixed opportunity that it presents, which over time is a gross as part of the KE portfolio. We think it gives us a real opportunity to continue to expand both EBITDA and gross profit margins across Kelly Education.
Yeah, and I would just add the market opportunity is significant. It's a very, very fragmented market. Many areas are just small players, either single market or small regional players. And so as we, as Chris said, bring that more as a combined integrated offering to our clients, both existing and net new as we're selling in the new selling cycles, we have significant opportunity there to penetrate much more deeply than we are today.
Great. Thank you. Thanks for taking the questions. I'll turn it back over.
Operator
Thank you. And as a reminder, to ask a question, please press star one one on your telephone. Our next question comes from Mark Riddick with Sidoti. You may proceed.
Good morning, Mark. Good morning.
I wanted to touch a little bit on some of the sort of the progress that you're seeing with some of the leadership additions that you've made through the year. And then I know there was another one just, I guess, a month or so ago of adding to your leadership team on the Chief Product and Technology Officer.
I was wondering maybe sort of touch a little bit on some of the progress of those folks that you've added to your team, but also, you know, are there other areas that you'd like to add to strengthen the bench, if you will? yeah no thanks we're pleased really with the recent leadership appointments that we've made and you know what it means to our broader management team as you referenced we welcomed Alan Stokulski he joined as chief product and technology officer and and the role really reflects it's a deliberate decision to integrate our technology modernization initiative with our product and AI strategy. You know, as we scale AI deployment across the business, but also in this work as we support customers, we needed those work streams to be connected and aligned to not only our growth initiatives, but also some of the efficiency initiatives that we've talked about. Alan really brings the right experience for us, not only in this moment, but he is someone who's going to be able to help partner with us and our customers as we think about what's next for the future of work. And, you know, that's what's so important. You know, when I'm out with customers and we think about, you know, our product roadmap, we have to continue to make sure that that data intelligence layer, the IP that sits in many of the products in our set portfolio, that we continue to be able to scale the capability to unlock more value for customers And by bringing Allen in and really connecting AI, product, and IT together, we think it's really the right time to be able to do this and to bring more value. And then, you know, more broadly on your question, we continue to assess the talent and making sure we've got the right people and the right roles to execute our strategy. And we're going to continue to do that. But we're really pleased with the additions we welcome this year and with our start to the year, getting them integrated as part of the team.
And then I guess the last one for me, I guess, is I was wondering if you could talk a little bit about cash usage prioritization and sort of how you're thinking about that and whether there's potential for non-organic pursuits, and if so, sort of how you feel about the potential pipeline or maybe what's out there, level of attractiveness, valuation, things like that?
Yeah, great. Well, our approach, as we've talked about, to capital allocation remains balanced and opportunistic. We maintain the quarterly dividend in the quarter, obviously reflecting our confidence and ability to generate cash. In the near term, as Troy referenced in his prepared remarks, we prioritize debt pay down with the excess cash. and, you know, the work we did in the credit facility also continues to give us some flexibility there. But let me just turn it over to Troy now and talk a little bit more about cash and maybe liquidity as we move to the second half of the year.
Yeah, I mean, again, we paid, we generated $47 million, $48 million of free cash flow in the quarter. So, year to date, we're at $21 million. and so that went to pay down on the debt. Again, our debt is more short-term in nature, so we're able to pay it down very expeditiously and also draw on it very expeditiously as needed. To your question about, and for the year, I would say, look, we'll use cash in the third quarter. That's seasonal. Again, we have the education business winding down in the second quarter for the summer and then ramping back up again. Also, with the growth that we talked about and that we've set the expectation for, we are a working capital business, as you know, and therefore that will consume cash as we accelerate our growth rates into the back half of the year. But net-net, we should be a little bit more positive on cash flow for the four-year relative to where we are now. And as we look at the horizon, of course, we have a lot of work that we're doing internally, the leadership team, as we've talked about, the technology modernization, the integration work, But we continue to look at external opportunities and organic opportunities. The market is, you know, I think there's a lot of assets that are pent up just given the softness in the market. And so now that you're seeing the market turn, there may be some more assets coming on the market that could be attractive. And certainly there are some areas that are hotter than others, as we sit here today, some of which we play in and some of which we don't. So, as Chris said, we've got a very strong balance sheet. We have a lot of flexibility, and we'll continue to be opportunistic as we go forward.
Great. Thank you very much. Great. Thanks, Mark.
Operator
Thank you. I would now like to turn the call back over to Chris Layden for any closing remarks. Great. Thank you all for joining. We'll see you next quarter. Thank you all. Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
